By Richard Feight, CFP®, EA
Originally published in Focus Magazine
Small business owners are a special breed. We think differently than the rest of the world. That’s why considering retirement can be more challenging for us. In this article, I’ve outlined five things a small business owner should think about when contemplating retirement. Taking these things into account can make the transition to retirement an easier, and even exciting, process.
1. Do you have a vision for retirement?
We often get carried away with running our businesses. It’s as if we ARE our businesses. Our lives, our finances and our time are all entwined with our business, and the thought of retirement can be discomforting. So it’s important to have a vision of what retirement might look like when it finally arrives. In order to create a vision of retirement, ask yourself:
What am I going to do?
Where am I going to do it?
When am I going to do it?
To get to the heart of the matter, ask yourself: what would I truly love to do, if I could do anything? What’s important is the feeling or experience of enjoying or loving what you are doing. We’re human beings, not human doings. Finding your joy should give you the necessary charge to contemplate retirement.
2. Are you going to sell your business?
Lawyers and doctors figured this out years ago. They know that if they bring in junior partners or younger medical professionals, they’ll eventually have someone to buy out their clientele or position in the firm. This process can take years to plan, and if you only bring in one person, you’d better have a plan B in case he doesn’t work out. Another option could be to sell to a competitor or a new company entering the business. Years ago I had a dentist that bought his mentor’s clientele list because she was diagnosed with a terminal illness. She simply wanted a good home for her clients, and the list was sold at a very reasonable price.
In the finance industry, there’s a whole market for buying and selling practices. The market is provided by a company that values and lists your company for sale, and works with both parties on transitioning through the sale.
Don’t forget your plan B in case something goes wrong. Plan B can be as simple as liquidating your assets. According to Rick D’Aigle, a former jeweler and small business owner, when liquidating your company “there is much less risk in selling off assets than an external land contract arrangement.”
What happens if your company’s assets are all in your head? If your company consists of knowledge stored in your head, you might compile a list of competitors you admire, and give that list to your current clientele. Or be like the dentist, sell at a very reasonable price to someone you know will take care of your clients. Wouldn’t it be nice to know your clients or business is being taken good care of?
3. How much do you need for income?
General rules say 70 to 80 percent of your current income is what you’ll need in retirement. But that doesn’t apply to business owners. Our gross and net incomes aren’t always that clear. When times are tough, we can live on very little. When they’re good, we tend to invest heavily back into our businesses. So as business owners, we need to take inventory of how much we spend on personal expenses, so that we can reasonably estimate what we’ll need in retirement.
The best way to figure out your expenses is to keep a journal of your personal and mix expenditures. Mix expenditures are expenses that are part business, part personal. Good examples of mix expenses are automobile expenses and mobile phones.
It’s easy to track expenses at Mint.com, and other free budgeting software. Enter your credit card and bank login info and Mint.com does the rest. It pulls the last three or four months worth of transactions into your budget and categorizes 70 percent of them. You categorize the rest, and you’re on your way to tracking your personal expenses.
4. Where are you now?
After you figure out how much income you’ll need in retirement, it’s time to take inventory of where you are with your “nest egg.” You’ll need to know how much you have, and where your assets are. This will let you know how close you are to being able to retire.
You have to have assets outside your business. A cash buffer can help you transition from work to retirement. Investments and pensions are going to give you your income stream, and use assets, like cars and houses, will give you an idea of future expenses. Tax savvy business owners that show little income over the years may need savvy social security planning to boost their social security estimates. You can see your social security estimates at http://www.ssa.gov/retire2/estimator.htm.
5. Do you have a mentor?
Having a friend or fellow business owner that’s going through or went through the retirement process can be invaluable. Rick D’Aigle said that he “watched his father enjoy his 20-year retirement and learned a lot.” He also said that “one of his former customers retired a couple years before him, and his advice was invaluable.” Being able to bounce ideas off colleagues or fellow SBAM members can reduce your workload when preparing for retirement.
When I asked Rick what the number one thing small business owners should be aware of when planning to retire he said, “If owning a business made you happy, you’ll need to find something to replace your happiness in retirement.” Owning a business was simply a means to an end for him, so he felt no loss. Let’s hope that your transition will be as smooth as his. — SBAM
Richard Feight is a fee-only Certified Financial Planner™ at IAM-Financial.com, and blogger at ThinkingBeyondNumbers.com where he helps self employed business owners and professionals organize their finances so they can retire on time.